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Buyer’s Market

As the global director for terminals marketing at the Vodafone Group, Peter Becker-Pennrich holds decision making powers over a procurement strategy that deals in serious volumes. Vodafone buys between 60 and 70 million handsets each year, spending $8bn across it’s footprint, including affiliates and partner markets.

Just eight vendors account for 98 per cent of the handsets Vodafone offers and Becker-Pennrich says he expects this number to go down. He won’t reveal how many models are in the Vodafone portfolio, saying only that it is a number similar to that targeted by Telefónica, which is looking to slash its 240-model range by more than half. He adds that he anticipates “quite a bit” of reduction in the number of models on offer during 2012.

As Telecoms.com speaks to Becker-Pennrich, late in November 2011, the handset sector is in an even greater state of flux than usual. Over the past few months Nokia and Microsoft have blasted back into the smartphone market, Apple’s talismanic leader Steve Jobs has died, RIM has continued to founder and Ericsson has announced its departure from the handset market, with Sony buying it out of the two firms’ JV Sony Ericsson.

Do you think that vendors are managing to differentiate themselves successfully in the smartphone space – particularly the competing Android vendors?

I don’t think they’re doing it very successfully in terms of impacting customer choice. If you were to compare devices from Sony Ericsson, Samsung, HTC and the rest, you would actually find quite a lot differences. But what we see from the behaviour of customers in the market is that they typically gravitate towards the large brands. It’s very hard for the smaller players to find ways to differentiate on top of what has become a very standardised design, which is a small tablet. There’s not much design innovation you can bring around tablets and on the OS side the choices are limited. So in terms of customer perception the differentiation is relatively low.

Will that change and, if so, how?

My personal theory is that, if you look at the last ten years in this industry, we’ve always gone through cycles that are driven by some form of technology innovation. So when we started Vodafone Live! we had the clamshell form factor coming into Europe, along with colour screens and cameras. That used to be a €400-plus segment but it went down in price over time.

So camera phones brought the Japanese players to Europe, who had not really been present before, while Nokia missed the boat. Later, the arrival of 3G brought the Korean players in. Another trend was for flat phones like Motorola’s Razr, and another was the slider form factor.

Now, what happens at the beginning of the innovation cycle, typically, is that whoever owns that innovation is able to capitalise on it and build a brand value. Later on, as the innovation cycle flattens out and more players are part of it—and price goes through the floor—it’s very hard for the players who were not part of the first wave of innovation to explain to customers why they demand a premium price for their brands.

Then current trend for smartphones—started by the iPhone—has been unusually long, but it’s still just a trend. We’re at the very tail end of that trend right now and you can see that the players which led that trend initially are very hard to challenge. Vendors who can theoretically build similar products are struggling to convince consumers to take the risk and go for a lesser known brand.

So there is little differentiation right now, but I don’t think we are headed for a PC model, even though people have said that over the past ten years every time we get to the end of the innovation cycle and there’s nothing else on the horizon. I think there is always going to be something new that will change the world again.

If that’s true, what do you think that something new is going to be this time?

There are a couple of candidates. One is outside the phone space; I expect that the connected device category—by which I mean any consumer device that has a SIM but is not a phone, which is led by the tablet segment—will grow massively next year, simply because prices will come down significantly from where they are today. The number one or two reason for customers not to buy tablets today is that they are too expensive. That will be a significant growth driver for next year and our challenge is to make sure we have the right propositions and retail set up to capitalise on that.

Are you not concerned that tablets may be used principally over wifi connections, threatening the data revenue model?

That trend varies greatly across markets. I see that in the UK, but in other markets like Spain, Italy and Germany, we see almost the opposite distribution of wifi and 3G usage. Across the board in Europe it’s about 50-50. The operators are becoming more educated in how customers really want to use their tablets and are creating offers that are tailor-made to support these use cases. I would forecast that the share of 3G-enabled tablets is going up rather than down for the next year.

That said, there will always be a substantial share of people who want a “couch tablet” that they just use on their domestic wifi connection. We have offers for these too, with mifi and tethering options with smartphones. It’s not a problem, it’s a matter of offering the right way for people to connect regardless of which kind of product they have.

As I said, it’s not just tablets; look at our announcement on the Sony game player. We’ll see significant growth in the next two years for sure.

And what’s the other trend?

The second thing is that, whichever company can create a really smooth integration with the home environment—whoever gets that right first—will be able to command a premium on their products in the smartphone space. Devices will be very neatly bundled with whatever happens on TV, media centres, on home stereo and tablets etc.

I still need to find a product which really neatly works with everything I have at home. If you look at Apple or other suppliers, they are halfway there—I don’t think these guys have really cracked it yet. If they do then there will be a business model occur where someone would offer a quad-play including all the devices and all the services for a flat fee per month. That’s quite a disruptive business model for the device manufacturers. It could be good fro Samsung, Sony and Apple. But it would be harsh for other vendors. It would be hard for the likes of HTC, for example, which doesn’t have a play outside the mobile phone space.

So the vendors will be pushing to get users onto a single brand for all these devices, mobile and domestic?

I think so, because the ones that have the best potential to win in this space are the ones that already have a play in every element. So there’s a lot of sense in trying to drive people towards a single-brand home.

But what is happening on the horizon, and we just need to see how it gets commercialised, is that there are more and more standards like DLNA (Digital Living Network Alliance) and all sorts of streaming standards in the network and cloud storage. So there is the chance to actually offer something which is open. If someone works that out and finds a way to offer it across devices from multiple platforms, that could be a disruptive event for the entire industry.

Let’s return to the present competitive situation now. Nokia and Microsoft have made a high profile return to the smartphone space. Is Vodafone pleased to see them back with Windows Phone?

The duopoly of iOS and Android feels uncomfortable and, if you look below the surface, iOS makes it difficult for us to push our services and differentiation agenda. So competition is always good. But Android is actually much more helpful than WP at the moment if you look at the high level requirements from an operator perspective in terms of commercial flexibility, attractiveness to lots of vendors, the ability to pre-embed things and deeply root things into the OS.

Android does that quite neatly. The only problem is that if Google had a bad day and changed all its policies then there’s relatively little that the industry could do about it. That’s where a lot of the discomfort is coming from. So we need more competition in the smartphone OS space.

Windows Phone is not there yet. They are making genuine efforts for Windows Phone 8 but in Window Phone 7 there is still a lot to be wished for, especially when it comes to offering all those things we need on the enterprise side and the overall flexibility of the OS. Having said that there is benefit in having competition and more players on the market and that’s why we welcome Nokia and Microsoft back into that space.

In the past Microsoft has been criticised for taking too PC-centric a view of the world, and struggling in the smartphone space as a result. Do you think this fair, and has it changed?

I would have said that was true for a while but if you look at what they’re doing now, the Windows Phone 8 kernel is completely changing from Windows Phone 7 to be the same as they have for Windows 8 on the PC. Just look at it technically, two or three years into the future, what exactly will be the difference between a PC which happens to be quite flat and has a touch screen compared to a tablet compared to a smaller version of that which is a smartphone?

I would agree that, architecturally, Microsoft took a PC-centric view two or three years ago. But not now.

So do you think that Microsoft has a strong play in the smartphone space now?

Well, I continue to be confused with Microsoft’s stance. On the one hand they want to provide a fairly rigid, streamlined experience, saying they don’t want to confuse the customer. They want to have a brand recognition for their experience—they don’t want to be like Android where, in some cases, you can’t distinguish what’s underneath the skin that the vendors put on top of the OS. But in itself this is of no value for anyone in the ecosystem except for Microsoft.

On the other hand they want to appeal to as many OEMs as possible. But if they want to be restrictive with their experience and at the same time appeal to the OEMs, you just can’t square that. Why would an OEM be interested in taking the platform if they can’t differentiate on top of it?

My long term expectation is that at some point Nokia and Microsoft will become one. Not necessarily from a financial and corporate entity perspective but simply because it’s hard for the likes of Samsung and HTC to really justify any investments into Windows Phone if Nokia is benefiting from much tighter integration with Microsoft and the much bigger bet the company has made on Windows Phone.

Do you have a positive outlook on Nokia’s chances for success with its new offering?

I’m tentatively optimistic. I don’t believe that success is guaranteed but nor is it all doom and gloom which, you sometimes see in the analyst opinion pieces. Nokia stlll has one of the strongest and largest supply chains in the world. Their economies of scale are still significant. Unlike some of their competitors they do have a quite substantial presence, in all of the markets that we operate in, at least. It’s really important, if you’re a vendor, that you know how to work the channels and you’ve got enough sales structure in place.

And they do still have brand value, for sure—and a lot of brand recognition. This is a dormant asset because, if they manage to underpin that with more attractive products—and you could say the Lumia800 is an attractive product compared to what came before—then I can see how a lot of these things can be leveraged again, compared to where they were last year. There could be quite a good growth curve for Nokia in the smartphone segment in 2012. Is that going to happen for sure? I don’t know—but they have a fighting chance and therefore I’m tentatively optimistic.

Ok, so let’s go from a leader-turned-challenger to the company that effectively created the smartphone sector as we know it today; Apple. The firm lost Steve Jobs this year, and was overtaken by Samsung as the highest volume smartphone vendor, although Samsung has a far broader product range. Is Apple still a leader, and can the firm succeed without Jobs?

If we refer back to the industry paradigm about innovation cycles, then Apple were the ones that benefitted most from the latest one—and they have a lot of clout at the end of it. If the tablet is the next big thing then Apple have done a great job of also meeting that need from the start. It’s very rare in the tech industry that someone would be able to do that back to back.

So we just have to give them a lot of credit for what they’ve built. In doing so I think they did leverage their capacity for innovation. But looking into the company from my discussions with Tim Cook before he took his new role, and some of the guys that are running the iPhone and iPad business there, the whole company is completely built to execute from the top. They are so rigid on their processes—of going to market, of production, of everything you could imagine. It’s no wonder they are the most valuable tech company in the world right now because they have the best products delivered through the best processes.

The question is whether or not they will have the best product going forward. And you could argue that the iPhone 4s was a disappointment to many people. If you forget about brand value and all these kind of things, and just genuinely compare a Galaxy Nexus, SII or HTC sensation with an iPhone you find many reasons why the iPhone wouldn’t be rated as high as the others.

So the big question will be whether they can replace the genius at the top with enough empowerment in the system and at the same time maintain the rigour in their processes. If they can’t, then you can imagine that all their marketing guidelines, which are very strict and are quite clear on what the different channels can do and cannot do, will be impossible to enforce. And you can already see that in some markets at the edge of Europe or outside [the core markets] they are starting to really struggle to maintain the level of control they used to have.

If you have processes which are not built with flexibility and your content is not absolutely dominant any more, then you can’t just instruct people to act the way you want them to and that could be very disruptive to the business model that they have built.

Finally, I’d like to hear your thoughts about Research in Motion. That firm is having a tough time. Do you expect them to come out the other side ok?

RIM reminds me right now of Nokia around the point when Nokia was selling the N97, maybe a bit later. If you have strong leaders who take credit for taking company to where it is now, they really struggle to see that they shouldn’t be the ones who take it further forward. We’ve seen the same thing with Motorola, we’ve seen it with Nokia and now we’re seeing it with RIM.

I’m not sure whether RIM entirely understand the magnitude of the problem that they have. I don’t think it has completely sunk in. Look at their options; should they license another OS? I think it’s quite difficult because what makes your Blackberry really valuable is not the user experience of being able to write emails and integration and all of that. It is the unbeaten ability to have push email with very decent battery life; a service that is super stable, super robust. They’ve taken a lot of flack for the outage they had but they ran so many accounts for so many years when nothing happened. That’s their strength.

The magic sauce of this thing is just about where the silicon hits the software. It’s very far down in the software development. So it’s not easy for them to put some standard software on top of their hardware and then somehow use all the things they’ve been developing. It will be a massive effort but I think they will go for an open OS which they don’t control—which is why they made the QNX purchase.

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